All you need to know about Venture Capital

 

Venture Capital is a type of private equity investment that investors provide to start-ups and small businesses that believe they have the potential to grow in the long run. In this article, risky investment, its principles, how venture capital works, history, Venture Capital process, how these investors earn money, ‌ companies and individuals engaged in this type of financing, venture capital investment in crypto, we discuss the difference between the initial coin offering (ICO) and the initial exchange offering (IEO) and the advantages and disadvantages of this investment. Stay with us on Coinmarketsig.

What is Venture Capital and how does it work?

This type of investment or financing includes wealthy investors, investment banks and any other type of financial institution. Of course, Venture Capital does not always appear as “financial” and can also appear in the form of technical or managerial expertise. This capital is usually given to small companies with high growth potential or companies that are growing and expanding rapidly.

This financing is usually done for companies with less than 2 years of experience or companies that do not have access to bank loans or capital markets. Venture capitalists usually become the main shareholders of these companies and participate in the company’s decisions.

Of course, high-risk investment can be very risky for investors; because the company may not be profitable enough or even lose money and eventually fail altogether.

In a venture capital investment, the company’s ownership is divided into smaller shares (stocks) and sold to a number of investors in the form of a limited partnership (a partnership consisting of two or more people) created by venture capital companies. Sometimes these partnerships include a pool or a number of similar companies.

An important difference between venture capital and other private ventures is that venture capital is focused on start-ups looking for large investments; Private investment, on the other hand, focuses on larger companies looking to inject capital or equity stocks.

The unexpected success of this type of financing comes from Silicon Valley start-ups. In Silicon Valley, the entrepreneur was looking for new industries and technologies, and a venture capitalist was financing the entrepreneur’s project, receiving a percentage of his income in return.

In the past, venture capitalists such as Arthur Rock, Tommy Davis, Tom Perkins, Eugene Kleiner, and other early investors played a key role in building the modern computer industry. High-risk investments today are mostly made by bankers and entrepreneurs who specialize in economics. The US Venture Capital industry is recognized worldwide as an engine for economic growth.

Bold investment history

Since World War II, high-risk investment has developed. Georges Doriot, a business professor at Harvard University, is known as the “father of venture capital.” He founded American Research and Development (ARD) in 1946 and raised $3.5 million to invest in companies that developed commercial technologies during World War II.

ARD’s first investment was in a company that wanted to use X-ray technology to treat cancer. When the company made the technology publicly available in 1955, the $200,000 Doriot had invested became $1.8 million.

These investments were initially made by banks in the Northeastern United States; But after the growth of the technology ecosystem on the west coast of the country, high-risk investment flourished there. Founded by William Shackley Labs, Fairchild Semiconductor is the first company to make a risky investment; this investment was made by the famous craftsman Sherman Fairchild. Arthur Rock of Hayden Bank, Stone & Co. in New York, helped make the risky investment and later founded one of the first VC companies in Silicon Valley. Tommy Davis and Arthur Rock have funded several tech giants, including Intel and Apple. In 1992, about 48% of all dollars invested were in the West Bank (including Silicon Valley), and only 20% of investments were made in the North Coast, and to this day (2021) these percentages remain almost the same. Is.

High-risk investment explosion and internet bubble

By the late 1980s, entrepreneurial investment profits had plummeted. The growth of the Venture Capital industry remained limited during this decade and until the mid-1990s; the industry was worth $3 billion in 1983, and grew to $4 billion 11 years later in 1994. That means only 25 percent growth in 11 years.

The advent of the Internet in the early 1990s led to the growth of the high-risk investment industry; because investors saw the launch of companies with very high growth potential. Netscape and Amazon were founded in 1994 and Yahoo in 1995, and all three companies were funded by venture capitalists, who brought huge profits to their investors. These profits led to more investment in the VC field, and the number of venture capital firms increased from 40 in 1991 to more than 400 in 2000, and the total capital increased from $1.5 billion in 1991 to more than 90 Billion dollars grew in 2000.

Risky investment process

The first step for any business to find a high-risk investor is to register a business plan with a VC company or a start-up investor. If the company or investor is interested in the proposal, it should conduct its own research, which includes business model, products, management and operating history, and more.

This research is very important because VCs provide large investments for small companies. Some companies or individuals with extensive experience in venture capital usually have a professional analyst to conduct this research, and these investors often focus on a specific industry.

When the investigation is completed, the company or investor must pay a portion of its capital in exchange for the company’s stock; Of course, the whole investment may be done all at once, but it is usually injected periodically. VCs can play an active role in advising and monitoring company progress.

How do venture capitalists make money?

High-risk investors receive a percentage of the company’s stock in exchange for financing small companies. These investors are looking for a strong management team, projects with high growth potential, unique products that can compete in the market. They are also looking for opportunities in different industries that they are familiar with and can have the chance to take over a large percentage of the company and influence its direction. These investors take a lot of risk. But if their risk pays off and the company succeeds, they will have a huge return on investment.

Wealthy individuals, insurance companies and organizations may merge their assets and hand over control and management to a Venture Capital company. The company invests in markets that are seen by banks and other capital markets as too risky to invest. Usually, in addition to its commission, the company deducts a percentage of the return on investment as a commission.

Investment companies usually make a profit before leaving the company they have invested in and leave the project and look for another company to invest in.

4 areas of interest for risky investors in 2021

The year 2021 has been full of unprecedented challenges due to the coronavirus epidemic. People around the world hope that by 2021 and beyond, the situation will return to normal and financially prosper.

For many people, VCs are one of the bright spots for them. Growth in this area can play an important role in improving the economic situation and financial services. Let’s take a look at some of the recent and promising trends in entrepreneurial investing.

Alternative data

Investors have previously used traditional data sources, such as press releases and financial statements, to make their decisions. This trend has now changed and given way to a variety of alternative data; from credit cards to social media, satellite imagery and even online job sites. Almost anything can be an important source of information for investors.

Venture capitalists use alternative data to find the companies that need the most funding, and use models that can accurately predict the potential of a particular product or start-up. This data provides a good insight into the various stages of a company’s development.

Sustainable investment

Sustainable investment has become very popular over the past few years. Given the importance of socio-political awareness, many VCs are investing in companies that will have a positive impact on global relations, environmental concerns, and most importantly, public health issues. This year we are likely to see more investors coming to the field and increasing development avenues for sustainable investment.

Automation and application of new technologies

Consumers have always been interested in new technology to use it to transform their lives. Businesses have also moved to process automation to ensure efficiency and stay competitive with other companies. As a result, the Fintech industry has been booming recently. For example, online education and banking have received a great deal of attention during the Corona epidemic; Because it provides remote access, learning and communication.

Cryptocurrencies

Although cryptocurrencies can be considered a branch of FinTech, the expansion of this field has led to a new trend on its own. Venture capital firms have found that the field offers a new business approach that bears little resemblance to traditional trading.

Venture capital investment in cryptocurrencies

Venture capital in crypto space is not much different from the traditional type; the only problem is that the start-ups that receive funding operate in the field of blockchain technology and in the cryptocurrency market.

The industry is only a decade old, and cryptocurrency-related businesses are experiencing a new and evolving field. As a result, venture capitalists are exposed to even greater risk; especially since the probability of failure is high and there are many scam projects in this area.

The blockchain revolution is often compared to the early days and the advent of the Internet; A period during which countless Internet companies mushroomed and made many promises and slogans; While among all those companies, few have survived to this day and some are now ruling the world.

The same slogans are now used in the cryptocurrency space with a new color and smell. Venture capitalists know that some start-ups in the blockchain may in the future take over the world from big giants such as Google, Microsoft, Amazon and Facebook; That’s why investing in cryptocurrency businesses has become so attractive, and some VC companies have invested exclusively in cryptocurrency and blockchain businesses.

Advantages of using VC for small companies

Benefiting from the experience and expertise of individuals, more resources for support, having wider communications and networking, no commitment to repay capital and more trust are the benefits that venture capitalists offer to companies. In the following, we will explain each of these benefits.

Business experience and expertise

Start-up companies, if they can get the opinion of a VC, in addition to financial support, will also benefit from their valuable guidance and advice.

This can help with a variety of business decisions, including financial management and human resource management. Better decision-making in these key areas can be critical and accelerate business growth.

More support

A VC can provide active support in a number of important areas, including legal, tax and personnel matters, which is an important step in the growth of a start-up.

Wider communication and network

Venture capitalists typically have good relationships with the business community. Using these connections can bring valuable benefits to small businesses.

 Non-commitment to repay the budget

In the event of a business failure, the start-up has no obligation to repay the venture capitalists. If a start-up wants to get a loan and the project fails, their next problem is repaying heavy loans; that’s why getting capital is essential for start-ups.

More trust

VC companies are overseen by legal entities. In the United States, for example, these investment companies are overseen by the Securities and Exchange Commission (SEC). These companies are subject to the same regulations that apply to other companies in this field.

Also, regulations on customer authentication (KYC) and anti-money laundering apply to these companies; because a large number of venture capital funds are financed by depository corporations and banks.

Disadvantages of using venture capital

In addition to the benefits that a venture capitalist brings to start-ups, there are disadvantages as well. Less ownership and less control, premature withdrawal, complicated process, late access to budget and low company valuation are the disadvantages of this type of investment for small companies and startups.

Less ownership and less control

The venture capitalist gives them large sums of money in exchange for start-up shares, and in return, the VC usually becomes a member of the board for a period of time (usually 5 to 6 years). They actively participate in the decisions of that business and every decision must be accompanied by the consent of the investors.

Depending on the size of the VC’s stake in the start-up business (which can sometimes be as much as 50%), they may no longer be in control of the company. In fact, they no longer own their company.

Early cancellation of venture capitalist

A VC may expect to raise capital in 3 to 5 years. As a result, this type of investment may not be suitable for the entrepreneur who needs more time to make his business profitable.

Long and complicated process

The managers of a start-up company must first present a detailed business plan. After that, the VC analyzes the program in detail and several meetings are held to discuss the program in detail. If the investor agrees to raise the capital, it may take longer to confirm the details. Therefore, financing in this way is usually a long process.

Provide budget on a cross-sectional basis

Because a partnership fund budget is so large, a VC may not provide all the money to the business at once. Most investing companies consider milestones in order to pay for businesses, and only give a portion of the capital to the startup if they reach those milestones. This puts a lot of pressure on that start-up business.

Valuation lower than expected

Venture capitalists are usually in a hurry to sell their stock; As a result, they may pressure the company owner to sell the shares in order to raise their initial capital. This haste may prevent a fair evaluation of the company and set a low price for it.

Leading companies active in venture capital investment of cryptocurrencies

Many high-risk investment companies are active in the field of crypto. Here are some of the most important and largest companies:

Digital Currency Group or DCG: The Company is the most active investor in the cryptocurrency industry, having invested in more than 100 companies in 30 countries. Some of these companies include Kevin Base, Circle, Ledger, Ripple and Shift.

Galaxy Digital: The company operates in 4 areas: trading (arbitrage, big trading, marketing and OTC), asset management (foreign capital management and ecosystem assets and passive investment), major investment (private investment, venture capital, Public investment, ICO investment and cryptocurrency with and without liquidity) and consulting (capital markets and technical consulting services for start-ups and organizations). The CEO and founder of the company is Michael Novogratz.

a16z crypto: The company has at least 10 years of investment plans and has been investing in cryptocurrencies for 5 years. The company invests in a variety of digital currencies, from new projects to fully developed projects such as Bitcoin and Ethereum.

Pantera Capital: Founded in 2013, Pantera Capital is the first Bitcoin investment company in the United States. Pantra is one of the largest companies in terms of crypto assets.

ConsenSys Ventures: The Company invests in Ethereum Network projects and contributes to Web 3 development.

In conclusion

Venture capital is very important in the world of cryptocurrencies. These investors can be large corporations or wealthy individuals. High-risk investment, as its name implies, carries a lot of risk. Thus, these companies or individuals receive a large portion of the company’s stock in exchange for financing start-ups as well as participating in project management. Every project that VCs want to invest in is first carefully researched and usually periodically injected into the project to reduce their investment risk.